HBSA

You won’t be able to work forever.

This might seem obvious, but there will come a time when you will either want to retire or be forced to retire.  When that happens, the choices you have made during the time you were working will determine your lifestyle after you stop working.  This is double-true if you are self-employed or own your own business.  You won’t have a corporate sugar-daddy paying you pension money.  And don’t bank on social security even existing when you’re ready to retire (it might still be around, but it’s meager contribution to your monthly income won’t be enough to really enjoy any kind of retirement.

The key is to understand the Four Spending Plans.  Even if you think you have no spending plan, everyone is on one of these plans, either by choice or default.

Spending Plan 1 – Invest 0%, Spend 100%

This is the spending track of a poor person. He spends every dollar he makes and saves nothing. Here’s a key rule to remember:

It doesn’t matter how much you make.
What matter is how much you keep

You can make $50,000 per month but if you spend $50,000 per month and keep nothing, you’re a poor person waiting to happen.  It’s not a question of if - it’s a question of when.  This is not where we want to end up.

Spending Plan 2 – Borrow 100%, Spend 200%

This is worse than Spending Plan 1.  You probably know a few of these folks – they’re the ones you read about that have a triple mortgaged home and a fist-full of maxed-out credit cards.  They make minimum payments on everything, scrape by month-to-month, and are peddling as fast as they can to keep the train from derailing.  This is where the magic of “leverage” works against you, and actually obligates you to future work.  Again, this is probably not where we want to end up.

Spending Plan 3 – Invest 10%, Spend 90%

This is the classic 10% rule.  If you have ever been pitched by a financial planner, this is their sage advice, derived from George Clayson’s best-seller The Richest Man In Babylon. They will even show you a fancy flip-chart showing how small chunks of cash turn into huge blocks over time with the application of compound interest.

The problem with this Spending Plan is that if you deal in currency with existing inflation and have some lame years in the market, the whole equation doesn’t perform near as well.  For example, those flip-charts you see are in theory – meaning, you take chunks of money, throw it in the market (usually a mutual fund), and then don’t touch it.  However, if they average a 10% return annually, you could theoretically lose 10% per year for 9 years, then increase 11-fold on the 10th year and make that benchmark.  The question is – would you have the patience and discipline to watch your investment evaporate for the better part of a decade in the hopes of an all-at-once payoff?  Maybe, but a lot of people don’t have the stomach for such emotional whiplash.

Spending Plan 4 – Invest 90%, Spend 10%

Want to know why the rich get richer?  It’s because they are on this spending plan.  Want to know how to go from poor to rich?  Get on Spending Plan 4.

Now, a lot of people wouldn’t be able to live off 10% of their income.  But if you are making $50,000 per month, it is entirely possible to live off $5,000 per month and invest the remaining $45,000.

Amazing things happen when you’re saving and investing 90% of your income.  You really only need to do this for a little over a year before the 90% pool of capital can generate enough income to cover your 10% living expenses.  At that point, you can hang it all up and go live on a beach if you want.  But why stop there?  Keep on the 90% track and you’ll soon join the ranks of the ultra-affluent.

What if you don’t make $50,000 per month?  Like I said -it doesn’t matter how much money you make. If you spend it all, you’re not rich, and you’ll have a very difficult time ever becoming rich.  If you don’t make much money, then cut your expenses, and start saving.  There are plenty of places in the county where a mortgage runs $5K+ per month (California, New York, etc).  There are also places where a mortgage on a nice house runs $500 per month (Oklahoma, Arkansas, Mississippi).

What’s the difference between these places?

90%.

The choice is yours.